SOFR So Far

Above are a couple of good primers on the impending roll out of SOFR. Stringing out 3 month SOFR futures in deep and resilient packages will be an important step in the rate's rapid jump from infancy to benchmark.

As this roll out has approached, a steady march upward has occurred in the soon to be tar-pitted rate sets that bench-marked money rates for the last 35 years. Much ink has been spilled of late to explain the relentless rise ex-post. Even Seeking Alpha, on Mar 13, posted on the now nearly 6 month rise with a chart. The "deep dive" amounted to "I'm no technician, but this looks like a breakout !" Sad trombone. We have been yakking about this rate adjustment (and cheering on its arrival) since Q4 2017. Now, looking forward to the April SOFR roll out and the May futures contract, these wider and higher sets offer a cushion to the largest switch from an existing rate base to a new anchor in monetary history.

Even with the long lead time for participant adjustment, billions of dollar (and yen and euro) products could find themselves adrift after the disappearance of their underlying. Nearly 2 million Eurodollar contracts traded from Dec 2018 to Dec 2020 last Friday alone. Over $10 T notional amounts remain in open interest covering the same term. This is a BIG universe and its getting a new Sun.

Of course, nothing will go bump or bang, let alone crash. Of course not. Just like raising the funding rate and shrinking multi-trillion dollar balance sheets, everything will go smoothly and just as planned (hoped). Considering the underestimation of most as to the already significant rise in term structure sets, we feel the potential depth and liquidity needs of the soon to be hatched market will be too shallow for efficient operations. An unexpected need for actual dollar funding in the first 6 months (minimum) of SOFR bench marking could become dicey. The predicted non-event re-Sunning of the financial universe will need a narrowing of current relationships to confirm.